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7 Things to Consider Before Starting a 529 Plan

Posted on by yfpadmin

The following is a guest post from Dr. Jeffrey Keimer. Dr. Keimer is a 2011 graduate of Albany College of Pharmacy and Health Sciences and pharmacy manager for a regional drugstore chain in Vermont. He and his wife Alex have been pursuing financial independence since 2016. Check out Jeff’s new book, FIRE Rx: The Pharmacist’s Guide to Financial Independence to learn how to create an actionable plan to reach financial independence.

Let’s face it, paying for college stinks. Whether you are in school, you’re trying to keep up with your child’s tuition which tends to increase by twice the rate of inflation every year, or you’ve graduated and are facing paying back student loans, the cost of higher education can be a tremendous burden.

So what can you do about it?

Well, the first, and most obvious answer here is you need to save for it. Sure, there are other things you can do to reduce the cost of college such as scholarship hacking (i.e., applying for every scholarship under the sun in the hope you get some) or taking a job with a college offering tuition reimbursement as a benefit, but those kinds of silver bullets aren’t the norm. No, chances are you’re going to need to start thinking about college expenses well in advance and start saving sooner rather than later.

Thankfully, the government gives college savers a helping hand in the form of tax-advantaged savings vehicles; the two most popular choices are the Coverdell Education Savings Account and the 529 plan. In this post, we’re going to do a deep dive into the more popular latter option: the 529.

What is a 529 Plan?

In a nutshell, a 529 plan is simply an account that allows money to be invested and grow tax-free for future education expenses. This is similar to other tax-advantaged accounts like an IRA or 401(k). Unlike those plans, money in a 529 plan can only be withdrawn (without penalty) to pay for qualified education expenses. If the expense qualifies, the money coming out of the plan also comes out tax-free. What’s more, contributions made to 529 plans can have some tax benefits too depending on your state (more on this later). In this respect, the 529 falls somewhere in between a Roth IRA and an HSA in terms of preferential tax treatment.

Before opening one, there are several things to consider; and most, if not all, will depend on your situation. What follows is a brief overview of seven main considerations before starting a 529 plan and it is not an all-inclusive list. As always, if you have questions about how best to incorporate these concepts into your financial plan, make sure to reach out to a financial professional like those at YFP Planning.

Let’s dive in.

What to Consider Before Starting a 529 Plan

1. Which Type of 529 Plan is Right for You?

Like many things in life, even those trying to save for college can find themselves facing the tyranny of choice. Case in point, as of when this post was written, there are 150 different plans considered to be 529 plans. But fear not! We’ll help you sort through it.

First off, you need to decide on the general type of 529 plan you want. While the term “529 Plan” is sometimes used as a catch-all for these savings vehicles, there are only two distinct types of plans governed by section 529 of the Internal Revenue Code: prepaid tuition plans and savings plans.

With a prepaid tuition plan, you do just that: pre-pay tuition. The idea here is that since the price of college tuition tends to increase quite a bit over time, it’s better to prepay to lock in tuition prices at today’s rates. In addition, by using a prepaid plan, there can be far less guesswork in the planning process. Sounds good, right? There’s a catch.

As you may have guessed, when you pre-pay tuition, you’re pre-paying at an institution’s (or institutions’) going rate. As such, you may be limiting where the funds in the account can be spent. After all, you can’t pre-pay 4 years’ worth of tuition for an inexpensive state school and then expect Harvard to say you’re all paid up for there as well. What happens with prepaid plans is that the pre-payment is based on the tuition rates at schools either in a particular state or within a private network of schools outlined by the plan; and to use the prepaid plan as intended, the beneficiary would need to attend one of the covered schools. If the beneficiary chooses to go somewhere else (or doesn’t get into a prepaid school) options are generally limited to changing the beneficiary of the account, rolling the account value into a 529 savings plan, or getting a refund (usually with fees applied).

On the other hand, 529 savings plans offer much more flexibility. With a savings plan, you’re able to use account funds for qualifying expenses at thousands of colleges and universities in the US and abroad as well as private/religious K-12 tuition (up to $10,000 annually). In addition, money added to a savings plan can be invested, similar to a workplace retirement plan, allowing you to grow the account faster when compared to a prepaid plan. Finally, unlike prepaid tuition plans, where participation can be restricted depending on the beneficiary’s state of residence, 529 savings plans are generally open to anyone.

However, not all 529 savings plans are created equal and some are, objectively, better than others. Separating the wheat from the chaff here can be a kind of daunting process too as savings plans comprise the vast majority of available 529 plans and there are several variables to consider for each; such as state-specific tax breaks, plan fees, and investment choice. What’s more, unlike a prepaid tuition plan where the amount you need to save is explicit, market returns (which are relatively unpredictable) are going to play a more central role in the plan’s success. Given the added uncertainty, a savings plan might not work for everyone.

Finally, I should note that while many people choose to use one type of plan or the other exclusively, there’s no law saying you can’t use both. For some, combining the greater certainty of the prepaid plan with the flexibility of a savings plan by investing in both can be a good fit.

2. Should You Use an In-State 529?

Once you’ve decided the kind of 529 plan you want to use, it’s time to start narrowing the list of available plans to the one best suited for the plan’s beneficiary, and you! Generally, the next step here is to decide whether or not to use a plan specific to your state of residence.

Unlike other tax-advantaged accounts such as IRAs and HSAs, the federal government doesn’t offer any tax incentives for 529 contributions. However, depending on your state of residence, contributions made to a 529 plan can have state income tax incentives such as deductions or credits. Here’s where things can get a little challenging. The rules surrounding state tax incentives are, much like state pharmacy laws, kind of a patchwork across the country.

For instance, in my home state of Vermont, my wife and I get a 10% tax credit on up to $5,000 worth of 529 contributions per beneficiary per year as long as we make those contributions to the official in-state 529 plan. If we lived in Pennsylvania though, we could get a tax deduction on up to $30,000 worth of contributions per beneficiary per year and it doesn’t matter what 529 plan we use. But on the flip side, if we lived in California, it doesn’t matter how much we contribute or what plan we contribute to because California doesn’t offer any tax incentives for 529 contributions.

As you can see, the relative value of these tax incentives can vary a lot from state to state. You could live in a state that heavily rewards saving for college…or not so much. When choosing a 529 plan, paying attention to how your state treats contributions can help you avoid leaving money on the table allowing you to save for college much more efficiently.

3. Is Your In-State Plan a Good Investment?

A saying in the investment world is “don’t let the tax tail wag the investment dog” and I think it’s extremely relevant when choosing a 529 savings plan. When it comes to investments, 529 savings plans share a lot in common with workplace retirement plans such as 401(k)s. They both limit your choice of investments to a short menu of options and tend to offer the same types of investments no matter where you go. Typically, this means an age-based allocation strategy (similar to a retirement plan’s target-date fund) and some stock, bond, and cash choices for those who want a more custom portfolio.

So if there’s not much difference between savings plans in terms of what they offer, why should an investor care about which plan they choose?

Fees!

Just as I said in an earlier post on investing basics, fees can have an enormous impact on your overall investment returns. Their effect on the performance of a 529 savings plan is no different. While many plans offer solid low-cost investment options, some do not. And worse yet, some plans charge high admin or advisor fees on top of those already charged by the funds you invest in. Yikes!

So going back to the old investing adage “don’t let the tax tail wag the investment dog,” the presence of high fees within your in-state options is a good reason to think twice before investing. After all, getting a couple of hundred dollars back in taxes but losing thousands due to fees over time is the very definition of penny-wise, pound-foolish.

It’s for this reason that many people who choose to use a 529 savings plan opt for an out-of-state plan. Once you’ve decided to invest outside the limited options provided by your state, you’re free to choose whatever plan you want; some of which explicitly market themselves as low-fee options.

In addition, depending on your state, it may be possible to invest in the in-state option, get a tax break, and then later, move the investment to a more fee-friendly out-of-state plan (so-called “deduct and dash”). Yes, it’s possible to have your cake and eat it too. This sort of thing isn’t allowed in all states though, and doing so in the wrong state might cause tax penalties. Be sure to check first with a CPA or another qualified tax professional before pursuing such a plan.

4. What Types of Expenses are Covered?

When I was in college, I spent a whole lot of money on a variety of things that were loosely affiliated with my status as a full-time student. However, a number of those expenses that I would’ve considered to be “college-related” wouldn’t have been considered qualified higher education expenses covered by a 529 savings plan. Here’s a short list of what would’ve made the cut:

Tuition and fees
Room and board (limited to the costs published by the college attended)
Textbooks
Computers (related to schooling only, sorry no gaming or crypto mining rigs)
Student loan repayment ($10k lifetime max per beneficiary as of 2021)
Tuition for private or religious K-12 education (up to $10k per year)

But what about other things such as transportation or the cost of an internet connection for the apartment? Surely those are “education-related expenses” and would be covered, right? Wrong! This is where people trying to pay for everything related to a child’s schooling can get into trouble when using 529 funds.

So what happens if money from a 529 savings plan gets tapped for a non-qualified expense? First off, relax, no one from the government is going to come and break down your door about it. However, you will owe ordinary income tax on the portion of the withdrawal that comes from account earnings as well as a 10% penalty; very similar to what would happen if you withdrew from a Roth IRA before age 59 ½.

5. What are Your Plan’s Contribution Limits?

So just how much money can you squirrel away in a 529 savings plan? Well, the most accurate answer here is “it depends.” Contribution limits are set not by the federal government, but instead by the states, and it ends up being another legal patchwork across the country. In addition, contribution limits are not based on some yearly amount that you can put in, but by a limit on the balance of the account. Once the account’s value reaches the prescribed limit, no more contributions can be made until the balance falls back below it.

On the other hand, even states boasting the lowest allowable balances let you build up quite the war chest before the limits are reached. For example, as of 2021, even the strictest of state-sponsored plans have a limit of $235,000 per beneficiary; quite a bit if you ask me. And if that weren’t enough, some states will even let you have over half a million in a 529. At that point, if you can’t pay for college, you’re doing it wrong.

6. Is “Front Loading” Contributions the Right Move?

Another question often asked about 529 plans is whether you should front-load the contributions (aka. lump sum invest) or spread them out over time (aka dollar cost average). Fortunately, there’s some guidance on this and generally speaking, it’s better to invest as much as you can as early as possible. As the adage goes “time in the market beats timing the market.” The more time your investments have to grow, the better chance you have for those investments to grow.

In addition, the IRS makes a special exception for 529 contributions when it comes to gift taxes. Normally when you give money to a child, there’s a $15,000 per year cap per person, per child ($30,000 for couples filing jointly). However, the IRS makes an exception for gifts going to 529 accounts, allowing you to front-load 5 years of contributions into one. This could mean up to $150,000 going into a 529 account in a single year! Now I know what you’re thinking, that sounds pretty baller even on a pharmacist’s salary, but hear me out. Given the exception, front-loading a 529 account like this can be a very good play for those receiving an inheritance or other significant windfall. While it won’t keep you from paying taxes on the money you get, it can keep that money growing tax-free and for a good cause.

7. What if My Kid Doesn’t Use It?

Finally, when thinking about using a 529 as part of the financial plan, you should consider what to do with it if the original beneficiary doesn’t use all the money in it to fund their education. Or who knows, maybe they don’t use any of it! What happens then?

Fortunately, the 529 isn’t a use-it-or-lose-it type of savings vehicle like the flexible spending account (FSA) you may have at work for healthcare expenses. The money saved in one will continue to be there regardless of what your kid chooses to do in life. So if they don’t use it all does it make sense to just cash it out? Maybe, but transferring the account to someone else will probably make more sense when you consider the taxes and penalties you’d have to pay on such a move.

So how does that work? Well, it could be as simple as just changing the name of the beneficiary on the account. First kid not going to use the money? Now that money belongs to the second kid. Done. You could even name yourself as the new beneficiary to help fund yourself going back to school, something that may become necessary in the future. As Yuval Noah Harari points out in his book, 21 Lessons for the 21st Century, the speed at which new technologies are disrupting old industries these days may make it difficult for anyone to stay in the same profession for 40 years; especially those in highly specialized ones such as pharmacy. Given that, utilizing a 529 account to fund not just your childrens’ but further your education by taking advantage of their ease of transferability can help protect you and your family from this kind of uncertainty.

But what if the person you want to name as a beneficiary already has their own 529 account? No worries, you can just combine the accounts once a year through a rollover. A rollover can also be a good choice if you move states and the new state you’re in has a better plan.

Conclusion

Overall, 529 plans can be a solid choice as a savings vehicle for future education expenses. With their preferential tax treatment, high contribution limits, and ease of transferability, choosing to use a 529 plan versus alternatives such as a taxable brokerage account can make a lot of sense.

529 Plans aren’t without their drawbacks though. The quality and tax benefits of 529 plans can vary from state to state, with some states making investments in their 529 almost a no-brainer and others…well, not so much. In addition, the requirement to spend 529 money on “qualified higher education expenses” only without incurring a significant penalty, can definitely be a turn-off for those who don’t care for restrictions on their savings.

Need help determining how to best save for your child’s education?

In the end, the suitability of a 529 plan as a savings vehicle is going to come down to your family’s financial plan. The seven considerations I’ve spoken to above are good for getting an appreciation of these types of plans and how they might fit into your plan. But it’s no substitute for doing in-depth research or working with a financial professional. If you think you need more help deciding whether a 529 plan is a good fit or which one to choose, feel free to reach out to the team of fee-only, comprehensive CERTIFIED FINANCIAL PLANNERS TM at YFP Planning. They can walk you through all the ins and outs of saving for college and getting the most from your customized financial plan.

You can book a free discovery meeting with our team to see if YFP Planning is the right fit for you.

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10 Financial Benefits for Federal Pharmacists You Wish You Had

Posted on by yfpadmin

10 Financial Benefits for Federal Pharmacists You Wish You Had

The post is for educational purposes and does not constitute financial advice. The post may contain affiliate links through which YFP receives compensation.

The federal government is one of the largest employers of pharmacists and offers many unique practice opportunities beyond traditional roles.

Besides the Veterans Health Administration and the Indian Health Service, federal pharmacists also are employed at the Centers for Disease Control and Prevention, the Federal Drug Administration, the National Institutes of Health, the Department of Defense through one of the military branches, and the Department of Justice in the Federal Prison Bureau.

Pharmacists tend to find their work extremely satisfying with the hours and flexibility in schedule being among the top reasons which are something I can personally attest to after spending nearly a decade in a government position.

But beyond these factors that can positively contribute to one’s quality of life, there are also some huge financial perks of being a federal pharmacist.

While salaries are usually less than those in community pharmacy positions, the gap isn’t that wide. However, it’s really the employee benefits in combination with one’s salary that make the total compensation package so generous.

1. Federal Employment Retirement System (FERS) Annuity

As a federal pharmacist, your retirement plan has three components: a FERS basic benefit plan, Social Security, and the TSP (Thrift Savings Plan) which I’ll discuss later on. Contributing to your basic benefit plan each pay period is mandatory and the amount you contribute depends on when you were hired with those starting in 2013 and 2014 paying a higher percentage than those with an earlier start date.

The FERS basic benefit plan is essentially a pension paid out as a monthly annuity which is pretty amazing in a world where these are basically extinct. Remember, this is in addition to any social security income you are entitled to.

How much will I get?

Your benefit is calculated using a pretty straightforward formula:

1.1% x High-3 x Years of Service = Basic Annuity Annual Payment

If you retire before age 62 or at age 62 with less than 20 years of service the 1.1% multiple is reduced to 1.0%. Your “High-3” is your highest average salary for three consecutive years which is usually the last three years of your service. This number is based on your average rates of basic pay which does not include bonuses, overtime, allowances, or special pay for recruitment or retention purposes.

Length of service takes into consideration all periods of creditable civilian and military service and only years and months are used in this calculation, so odd days you worked beyond a month are dropped.

Here’s an example of this calculation: Let’s say you are 62 years old, have been a federal employee for 30 years and your “High-3” salary is $150,000. This would result in an annual annuity of $49,500.

If you don’t want to worry about all the rules check out the FERs Retirement calculator below.

FERS Retirement Calculator

When can I retire?

To be eligible to receive the basic retirement annuity you have to meet two conditions. First, there is a minimum number of service years. If you retire at 62, that number is 5, 20 years if you retire at 60, and 30 years if you want to retire at your minimum retirement age (MRA) and that happens to be prior to age 60.

You can also retire at your MRA with 10 years of service, but your benefit is reduced by 5% per year every year you are under 62 unless you have 20 years of service and your benefit starts when you reach age 60 or later.

The second condition to retire is to reach your MRA and this depends on when you were born. If you are a millennial or Gen Z, then your MRA is 57. Sorry FIRE folks!

Check out this table to find out what your FERS minimum retirement age (MRA) is:

2. Access to the Thrift Savings Plan

The Thrift Savings Plan (TSP) is essentially the 401(k) equivalent for federal employees. It’s subject to the same contribution limits as other employer-sponsored plans at $19,500 with the option for $6,500 catch-up contributions if you’re 50 or older for 2020.

However, unlike many 401(k) plans there are some unique features and benefits.

First, regardless of how much you contribute, your employer will contribute an automatic 1% of your basic pay. In addition, your agency will match the first 3% you contribute dollar-for-dollar and 50 cents on the dollar for the next 2%. Essentially, you get a match up to 5%.

This is something to pay close attention to especially if you are a new employee as you are automatically enrolled in contributing 3% of your income. Therefore, unless you adjust this promptly when you start, you could be missing out on the additional matching contributions.

There is a 3 year vesting period but this does not include the 1% automatic contributions.

Similar to other employer-sponsored plans you have the option to make traditional contributions or after-tax contributions via the Roth TSP.

When it comes to fund selection, you have two basic choices: Lifecycle or target-date funds and individual funds. The lifecycle funds (L Funds) are a combination of the individual funds and every three months, the target allocations of all the L Funds except L Income are automatically adjusted, gradually shifting them from higher risk and reward to lower risk and reward as they get closer to their target dates.

There are five individual funds that range from government-backed securities to index funds with the objective to match the performance of the major stock and bond indices such as the S&P 500.

While one of the criticisms of the TSP is the lack of fund options especially for savvy investors, others tout the simplicity in the options and find it less challenging to navigate and make decisions.

But beyond the options that exist, the number one feature that sets the TSP apart from other employer-sponsored plans is fees!

The average plan fees for those with 401(k)s range from 0.37% to 1.42%. Compare that to the expense for the C fund in the TSP at 0.042%!

Here’s why that’s a big deal. If you were to invest $500/month over 40 years into two different funds with a similar performance of 7% rate of return, one with an expense of 1% and one with fees similar to the C fund, that fund with an expense of 1% will cost you about $700,000 over that period, significantly lowering your overall rate of return.

That’s the power of fees.

You can see the current expenses of the individual funds within the TSP. One of the major reasons why the fees are so low is that many employees leave money on the table when they separate from federal service prior to becoming vested and that helps offset the administrative costs.

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3. Life Insurance

Working for the federal government means that you’re eligible for the Federal Employees’ Group Life Insurance (FEGLI) program. FEGLI was started in 1954 and is the largest group life insurance program in the world covering over 4 million federal employees and retirees. This program provides basic term life insurance coverage as well as three additional options that can be added on (Standard, Additional and Family).

To give you an idea of cost, for ~$250,000 policy at age 35 would be around $40/month. You can calculate your potential cost based on coverage here.

One of the huge benefits of this program is that it does not require any medical exam prior to being in force. In fact, you are automatically enrolled when you start.

While getting access to affordable life insurance regardless of pre-existing medical conditions is an amazing benefit, the biggest downside is that it’s not portable. This means that if you are terminated or leave federal service for another position, you no longer have coverage. That’s why it’s important to consider a private term life insurance policy as well.

4. Long-term Disability Retirement Benefits

Beyond the life insurance benefit, you also have some protection in the event you became disabled while in federal service. This is known as disability retirement.

To be eligible, there are several requirements that have to be met including:

Completed 18 months of Federal civilian service which is creditable under the Federal Employees Retirement System (FERS);
The disability is expected to last at least one year;
Your agency must certify that it’s unable to accommodate your disabling medical condition in your present position and has considered you for a vacant position in the same agency at the same pay grade or level;
You, or your guardian, must apply before your separation from service or within one year thereafter;
You must apply for social security benefits. Application for disability retirement under FERS requires an application for social security benefits

The amount you’ll receive varies depending on your age and number of years of service. If you meet the requirements for traditional FERS retirement benefit based on age and years of service, then the calculation of benefits is the same.

However, if you are under 62 and not eligible for immediate retirement, the calculation gets a little more complex. For the first 12 months it is 60% of your high-3 minus 100% of your social security benefits you are entitled to and after that the calculation is based on 40% of your high-3.

Benefits are recalculated after 12 months and again at age 62 if the person is under age 62 at the time of disability retirement.

While this does guarantee at least some income beyond social security once you have at least 18 months of service, it’s not going to be similar to your take-home pay as a pharmacist.

Therefore, you should strongly consider an individual long term disability insurance policy as a supplement in order to move your potential replacement income closer to your current pay.

You will notice that when you are applying for policies, you will be asked if you are a federal employee. That’s because most states will not allow you to replace over 60% of your total income and this will essentially be a supplement.

5. HSA Eligibility

There are a variety of health plans that are offered for federal employees including fee-for-service plans (both PPO and non-PPO), health maintenance organizations (HMO), and high deductible health plans (HDHP) which offers a health reimbursement arrangement (HRA) or health savings account (HSA). This large variety of health plans allows federal employees to choose a plan that makes the most sense for themselves and their families.

I explained in a recent blog post Why I’m Not Using My Health Savings Account to Pay for Medical Expenses that choosing to use a PPO instead of the HDHP that was available to me was one of my biggest financial mistakes. This is because I was making high premium payments each month but wasn’t utilizing the majority of coverage that was available and I was missing out on the triple tax benefits that an HSA account boasts.

As mentioned, an HSA is unlocked through a high deductible health plan (HDHP) and can be used as an account to save for medical expenses. An HSA allows you to contribute money on a pre-tax basis to pay for qualified medical expenses, like costs for deductibles, copayments, coinsurance, and other expenses aside from premiums. If you’re using your HSA to pay for a qualified medical cost, you don’t have to pay any taxes on the money that’s withdrawn from the account.

In my opinion, the most powerful aspect of an HSA is that it can be used as a retirement vehicle, like an IRA. What makes an HSA so appealing are those triple tax benefits I mentioned. Triple tax benefits, you guessed it, all have to do with taxes; your HSA contributions lower your adjusted gross income (AGI), the contributions grow tax-free and the distributions are tax-free. If you’re under 65, the distributions are only tax-free if they are being used to pay for a qualified medical expense. If they aren’t, you’ll have to pay a 20% penalty. After age 65, your distributions don’t have to be for qualified medical expenses, but you will have to pay income taxes if they aren’t.

To learn about how I’m leveraging this benefit and how I’m allowing my money to stay in my HSA as long as possible, check out this post.

6. Paid Parental Leave

Paid parental leave varies so much from one employer to the next. Some companies like Netflix offer up to a year off of paid maternity or paternity leave while employees at other companies are “lucky” to get 4 or 6 weeks off, if any.

Due to recent changes, federal pharmacists will be able to receive up to 12 weeks paid parental leave for the birth, adoption or foster of a new child. This benefit is supposed to go into effect October 1, 2020.

7. Raises for additional credentials and board certifications

Federal employees are paid based on their grade and step and will have a GS or General Schedule status. The grade usually pertains to the position and the step is typically determined by initial qualifications at the time employment starts and also the years of service. Therefore, the most common way to get to the next level is often just to keep your job.

However, some federal employers may actually incentivize you to get these as well either in the form of a one-time bonus or even a permanent raise. In the VA they are referred to as Special Achievement Awards.

8. Opportunity to Pursue PSLF

When I graduated from pharmacy school, I made one of the biggest financial mistakes that ended up costing me hundreds of thousands of dollars! That was not pursuing the Public Service Loan Forgiveness (PSLF) program. As a government pharmacist, I was eligible for PSLF but because I wasn’t aware of all of my options and didn’t have a good handle on the program, I ended up paying way more money than I needed to.

Although PSLF has had a rocky past, it is one of the best payoff strategies available for pharmacists. The math doesn’t lie; PSLF is often the most beneficial to the borrower as far as the monthly payment is concerned (it’s the lowest) and the total amount paid over the course of the program (it’s the lowest).

Of course, determining your student loan payoff strategy takes a lot of thought and discussion. To learn more about all of your options, check out this post.

9. Tuition Reimbursement and Repayment Programs

Did you know that working as a federal pharmacist might qualify you for tuition reimbursement or to enroll in a tuition repayment program? These programs essentially provide “free” money typically from your employer or institution in exchange for working for a certain period of time.

Pretty awesome, right?

The programs that tend to provide the most generous reimbursement or repayment are those offered by the federal government through the military, Veterans Health Administration, and the Department of Health.

If you’re a pharmacist who works for or plans to work for one of these organizations, connect with your human resources department to see if you’re eligible. There is generally a set amount of funding for these programs, so even if you aren’t eligible initially, you may be able to reapply in a subsequent year.

Here’s a rundown of federal tuition reimbursement programs that are currently available:

Veterans Health Administration – Education Debt Reduction Program

Eligibility

Pharmacists at facilities that have available funding and critical staffing needs.

Benefit

Up to $120,000 over a 5 year period

Army Pharmacist Health Professions Loan Repayment Program

Eligibility

Pharmacists who commit to a period of service when funding is available

Benefit

Up to $120,000 ($40,000 per year over 3 years)

Navy Health Professions Loan Repayment Program

Eligibility

Must be qualified for, or hold an appointment as a commissioned officer, in one of the health professions and sign a written agreement to serve on active duty for a prescribed time period

Benefit

Offers have many variables

Indian Health Service Loan Repayment Program

Eligibility

Two-year service commitment to practice in health facilities serving American Indian and Alaska Native communities. Opportunities are based on Indian health program facilities with the greatest staffing needs

Benefit

$40,000 but can extend contract annually until student loans are paid off

National Institute of Health (NIH) Loan Repayment Program

Eligibility

Two year commitment to conduct biomedical or behavioral research funded by a nonprofit or government institution

Benefit

Up to $50,000 per year

NHSC Substance Use Disorder Workforce Loan Repayment Program

Eligibility

Three years commitment to provide substance use disorder treatment services at NHSC-approved sites

Benefit

$37,500 for part-time and $75,000 for full-time

10. Generous Leave Structure

One of the benefits that I have really appreciated while working for the federal government is the amount of paid time off. First, as a federal employee, you get all 10 federally recognized holidays off assuming you have a typical Monday-Friday schedule. But if you do have to work on one of those days, you get paid double time!

In addition to holidays, you start off accruing 4 hours of annual leave or vacation in addition to 4 hours of sick leave every pay period. This equates to a total of 7.2 weeks of leave as a brand new employee.

Once you hit 3 years of service, your annual leave increases to 6 hours and then to 8 hours per pay period once you reach 15 years of service.

When you become eligible for retirement, any accrued annual leave you have remaining is paid out to you in a lump sum whereas any remaining sick leave counts toward extending your time of service which can increase your overall FERS annuity benefit.

Conclusion

Working as a pharmacist in the federal government carries a lot of benefits that go way beyond your salary. Between possible student loan forgiveness with PSLF, access to TSP and HSA accounts, life and disability insurance, and raises for additional credentials and board certifications plus so many more, there are a lot of reasons to consider working for the government. If you’re currently unemployed, are a recent graduate or you’re looking to make a career change, I highly suggest checking out USA JOBs and sign up to get alerts as new positions become available.

Need Help With Your Financial Plan?

Trying to navigate your federal benefits can be overwhelming. If you need help analyzing how these benefits affect your overall plan or are looking to solidify your financial game plan, you can book a free call with one of our CERTIFIED FINANCIAL PLANNERS^TM.

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6 Situations When You Shouldn’t Pay Extra on Student Loans

Posted on by yfpadmin

The following post contains affiliate links through which Your Financial Pharmacist may receive compensation.

I love hearing stories about people crushing their student loan debt in record times and all of the crazy and incredible things they do to speed up the process.

For many pharmacists, it can make sense to get rid of student loans as fast as possible. This lowers the total amount of interest you pay and also frees up your budget to focus on your other goals. Beyond that, there can be an overwhelming sense of peace and freedom.

However, there are some situations where it doesn’t make sense to make extra payments or accelerate the process.

1. You don’t have an emergency fund

If you have typical pharmacist debt load, it will likely take you a number of years to pay them off even if you are being aggressive. During this time, life can happen.

Medical issues, car repairs, kids, and other life events can occur forcing you to come up with a lot of cash pretty quickly. Make sure you have a solid emergency fund in place before you get ultra-aggressive with your student loans.

2. You’re facing a crisis or major life event

Whether it’s a job loss, new baby on the way, or major illness, a number of things can occur with the potential to derail your financial game plan. If you’re faced with or expect something to happen that will require a lot of cash (exceeding your emergency fund), or anticipate a reduction in your income, temporarily putting extra student loan payments on hold and just saving it can be a good idea.

3. You’re seeking loan forgiveness

If you’re committed to the Public Service Loan Forgiveness (PSLF) program, making extra payments won’t make sense. The program requires you to make 120 qualified payments over 10 years and you can’t make the process go any faster. Therefore your ultimate goal is to pay the least amount as possible.

I know this can cause a little anxiety as your balance will actually grow over time due to interest as you make minimum payments. Plus, the news seems to be highlighting the thousands of people who are NOT receiving forgiveness for one reason or another. However, as long as you are following every step in the process, any balance will be forgiven tax free!

To do this you should choose an income-based repayment plan that results in the lowest payment (usually PAYE or REPAYE) and reduce your adjusted gross income.

The best way to minimize your total amount paid is to max out your traditional 401(k), 403(b), TSP contributions and HSA contributions if you have access to a high deductible health plan. You can read more about optimizing PSLF by checking out the ultimate guide to pay back your pharmacy school loans.

Remember, you can also receive loan forgiveness through the federal loan program after 20-25 years of income-driven repayments. This can be a good option for pharmacists who don’t qualify for PSLF and have a very high debt-to-income ratio.

The major difference is that you will have to be saving for the “tax bomb”as the amount forgiven will be considered taxable income. Even in the situation, it will not make sense to make extra payments on the loans.

4. You’re receiving tuition reimbursement/repayment

While not abundantly available, tuition repayment programs essentially provide “free” money typically from your employer or institution in exchange for working a certain period of time. Pretty awesome right?

Others will require you to pay an amount toward your loans and they will match or reimburse you up to a certain amount. The ones that tend to provide the most generous reimbursement are those offered by the federal government through the military, Veteran Health Administration, and the Department of Health.

These programs dictate the terms of the reimbursement and to get the maximum benefit, you will likely either need to make a set amount of payments in exchange for reimbursement such as the Veteran’s Health Affairs Education Debt Reduction Program (EDRP) or be employed for a specific term. Depending on the program, if you make extra payments you may not receive the full benefit of the program and could pay out more than you have to.

5. You have credit cards or other debt with high interest

From a purely mathematical standpoint, getting rid of debts with higher interest rates first makes sense. If you have credit card debt with 12% interest and student loans at 6%, you are going save money by paying off the credit card first. This is known as the debt avalanche method when you pay minimum payments on everything except the one with the highest interest rate.

6. You feel you can get a better return on your money somewhere else

Instead of paying extra on student loans, many people put that money toward retirement, small businesses, real estate or other investment with the rationale of making a better return. This is certainly a valid argument especially if you have a very low-interest rate on your loans like 2-3%. For example, if you have refinanced your loans with First Republic Bank, you can get a fixed interest as low as 1.95%.

With investments such as the stock or real estate market, there’s no guaranteed rate of return. You could actually lose money in that period. But you could also be incredibly successful like Dr. Carrie Calton who now has several income-producing rental properties which she started purchasing while she still had student loan debt.

Whether you choose to do this really comes down to how much risk you are willing to take on and your feelings about prolonging the time you are in debt.

Conclusion

Although paying extra on student loans and accelerating the time to being debt-free can seem like a great idea, there are some instances when that may not make the most sense. If you’re on track for loan forgiveness or receiving tuition reimbursement, make sure you are maximizing these programs to so you are paying the least amount possible.

If you’re not in any of these situations, then, by all means, knock out your loans ASAP. Besides cutting expenses and maximizing your income to throw more money each month at your loans, refinancing can also be a great option.

YFP has partnered with multiple student loan refinance companies in order to get you a nice cash bonus of up to $850 and sometimes more if there is a special promotion running. Yes, we get a referral fee when you refinance through our link, but we have shifted the majority of the payout to you.

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Three Strategies for Buying a House with Student Loans

Posted on by yfpadmin

Buying a House with Student Loans

Each month, many pharmacists throw thousands at a seemingly endless mountain of student loans often making it difficult to contribute to other financial goals such as savings and retirement. In addition, the dream of owning a home can seem completely out of reach. In fact, according to the National Association of Realtors, 83% of people aged 22 to 35 with student debt who haven’t bought a house yet blame their educational loans. This leads to the obvious question: How do I buy a house with student loans?

If you’re a pharmacist with typical student loan debt, you probably started or are starting your career with a significant negative net worth. Terrifying, I know, as this was exactly the position I was in. I pulled up my old budget while writing this post and although I cringe to admit it, my wife and I actually bought a house with a net worth of negative $262,000. Looking back, we probably could have prepared a little better, but at the time our top priority was buying a house even with our student loans. I’m happy to report that 4 years down the road we are in a much better position and buying our house at that time ended up being a great decision. Although you may be feeling like home ownership is far out of reach and years down the road because of student loans, you can still make it happen.

This post will explore the different strategies on buying a house with student loans and the advantages and risks of each. Because there are many factors that go into this decision, the goal is to help give you some tips so you can identify the strategy that best aligns with your goals.

Three Strategies for Buying a House with School Debt

There are three main strategies for buying a house with school debt. The first is to simply accept that you are going to be in debt up to your eyeballs for several years anyway and buy regardless as soon as you can. While certainly not the most conservative approach, the appeal of owning instead of renting can be a powerful motivator. The second tactic is the opposite of the first. Pay down ALL of your debt including student loans before jumping in and buying a property aka the “Dave Ramsey” method. The third and final strategy is a hybrid of the first two. The idea is to really assess your finances and pay down your student loans to some amount and then purchase. We’ll explore each option but let’s discuss some fundamentals first.

Renting vs Buying

Beyond answering the question of “how do I buy a house with student loans?”, there’s another common related question. That is: “Is it better to buy or rent?”

Many people make the argument that buying is always better than renting because you aren’t “throwing away money” and you get the opportunity to build equity. In addition, the statement of “if the mortgage payment is the same as the rent payment then buying makes sense” is commonly made.

Because of the way mortgages are structured with the amortization schedule, you actually don’t build much equity at all in the first few years as the majority of the payment will be going toward interest. Also, owning a home is hardly just making the mortgage payment. There are taxes, insurance, some communities have HOA fees, and stuff tends to break.

This question of buying or renting rarely has a simple answer and there are a lot of factors that can go into a comparison. These include the details of a potential mortgage, years you plan to be in the home, speculation of the home price growth and rent growth rate, inflation, your income taxes, as well as maintenance costs and fees.

While this topic could easily be it’s very own post, this is something to keep in mind even before getting into the different strategies. If you really want to crunch the numbers with considerations in your location, consider using the NY Times Rent vs. Buy Calculator.

Are You Ready?

Regardless of the strategy you choose, buying a house with student loans is a big decision and you need to be ready to take on that responsibility. Certainly, you have to have your finances in order to make it happen, but you also want to be emotionally prepared. That means being on the same page with your spouse or significant other and being able to devote time and energy to the entire process. That also means having your priorities and goals in place. Before getting into the numbers here are some key questions to answer:

Are my student loans and other debt causing significant stress?
When do I want to be free of student loan debt?
Am I adequately contributing to my retirement fund on a regular basis?
Have I built an emergency fund?
How will buying a home impact achieving my other financial goals?

Know Your Budget

Knowing your budget is key in this process and something you should establish before even getting preapproved or meeting with a mortgage lender. If you don’t do this, the lender will try to set it for you. Remember, the more debt you take on, the more you will pay in interest and if your mortgage takes up a huge chunk of your budget (a situation known as being house poor), it could put a strain on achieving your other financial goals.

Some people brag about how their mortgage is less than they would be paying in rent. However, they often forget to take into account things like home repairs, property taxes, maintenance, and insurance. Don’t ignore the full costs of a mortgage when setting up your budget. Check out our free guide on home buying for pharmacists if want to review all costs associated with buying a home.

Even if you think you’re ready to go all in and buy a home even with a large student debt load, you will have to meet some minimum financial requirements in order to get approved for a mortgage.

Debt-to-Income Ratio (DTI)

When a bank calculates how much they can lend you, they use the “28/36 rule” for conventional financing. This means that no more than 28% of your gross income may go to your total housing expenses. Furthermore, no more than 36% of your gross income may go to all your debts. Keep in mind these are maximum limits the banks set and stretching your budget to these rules could make it difficult to afford.

Let’s see what that looks like using an average income and debt load for a new pharmacy graduate. Let’s assume you make $115k in gross income. You have $160,000 in student loans with a 6% interest rate and a repayment term of 10 years ($1,775 per month). You also have a car loan and pay $350 per month towards that debt. The bank starts by calculating your 28/36 maximums.

28% rule = Max monthly housing expenses

$115,000 x 0.28 = $32,200 per year or $2,683 per month

Using the 28% rule, your total housing costs (Principle, Interest, Taxes, Insurance) cannot exceed $2,683 per month. (This equates to around a $450,000 house loan for a 30-year term) Assuming you pass the first test, they move to the 36% rule.

36% rule: = Max monthly gross income going to debt

$115,000 x 0.36 = $41,400 per year or $3,450 per month

Remember, the bank will not extend a loan that requires payments in excess of the 36% rule maximum of $3,450 each month. Your total debt payments each month with student loans and car payment currently sit at $2,125.

$3,450 – $2,125 = $1,325

(Maximum Debt)-(Current Debt) = Housing Allowance

This changes things quite a bit. Your $450,000 house loan was just reduced to $185,000. And remember this is the maximum the bank thinks you can afford but not necessarily what your personal budget may be able to handle. Your own financial situation will dictate whether these limits will become an issue for you or not. If you do find yourself over or very near the limit, there are a few things you can do:

1. Raise your income. Remember, it’s a ratio based on your debt AND your income. Starting a side hustle or a second job can give your top line the boost it needs to get you out of the red.

2. Lower your debt. If you pay off a credit card, sell your car for a cheaper one, or refinance student loans, you can adjust the debt side of the equation in your favor. If you don’t plan to use a loan forgiveness program, definitely consider refinancing your high-interest student loan debt through one of our partners. You can lower your DTI, pay less in interest over the life of the loan, and get a nice cash bonus!

If you are pursuing the public service loan forgiveness (PSLF){ program, then your goal should be to pay the least you can over 10 years. You can lower your monthly payments by decreasing your adjusted gross income (AGI) with pre-tax retirement contributions (i.e., 401(k), 403(b)). Lowering your payments in this way will also affect the numbers in your 36% rule.

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3. Consider a different loan product. While conventional loans use a 28/36 rule, there are many government-backed loan options that have looser requirements for DTI. FHA underwriting, for example, allows for limits up to 31% of your gross income and 43% of your total debt load. If you want more information on multiple loan options, check out our free guide on home buying for pharmacists. It’s also worth mentioning that these limits are in place to protect you from buying outside your means and it’s usually not in your best interest to try to work around them.

4. Reassess the size of your mortgage. This might seem obvious, but if you get to this point and still can’t make the numbers work, you might simply trying to buy too much house. In fact, the harder you have to work to get around your DTI ratio, the more likely it is you need to reassess your overall budget. This can be a hard pill to swallow if you’ve already located a house you really want. If you need a reminder for why these limits are important, just look back at 2008 when the housing market collapsed. A good portion of that failure came from people who owned too much house and too much debt for their income to sustain.

Credit Score

Next up, get your credit score up. There are countless reputable sites for obtaining your free credit score without it affecting your report. Most banks and credit cards even provide monthly credit reports so you can track things over time. Most lenders want your credit score to be above 750 for the best rates possible. Pulling your own credit score allows you to review the report for errors before heading to the bank. According to the FTC, more than 20% of consumers found errors on their credit reports that could be affecting their score.

Speaking of credit, regardless of the strategy you choose, you should knock out any existing credit card debt. The average APR for a credit card is 17%. This means that any gains you make with a good investment elsewhere are going to be eaten up by the interest costs of your credit card.

Down Payment

Often, saving up enough cash for a sizable down payment is one of the toughest parts of buying a house with student loan debt. With retirement contributions, other debt payments, rent, emergency funds, and everything else, it can be quite a challenge to save the thousands required. Although it’s easier said than done, try to use the process of accruing your down payment as a test for your new budget as a homeowner. Unexpected costs are going to come up and learning to live off a leaner budget now can help to ensure your success down the road. If you’re still struggling but have a generous family member, monetary gifts can also be used as your down payment without penalty. Don’t forget, while most conventional loan products require 20% to avoid private mortgage insurance (PMI), there are a number of options available with down payments as low as 3.5%.

All of these factors will be used by your lender to determine the loan products you are eligible for and the size of payments you can expect to make. Once you’ve crunched all the numbers and done all the homework from above, you’ll want to go ahead and get pre-approved.

Consider a Professional Home Loan

You’re well aware that student loans can make it challenging to save a 20% down payment (or else you wouldn’t be reading this post), especially if you live in a market where home prices are high and you have other competing financial priorities.

Additionally, getting approved for conventional loans can be tough because most lenders will count your student loans when determining your debt to income ratio as I mentioned earlier.

YFP has been on the hunt for another possible solution for you when a large down payment or conventional loans are out of reach.

We partnered with IberiaBank who offers a Professional Home Loan (aka Doctor’s Loan) that is available for pharmacists.

The Professional Home Loan product offers a 3% minimum down payment without PMI and is available in all states except Alaska and Hawaii.

Learn more about this loan product and the 5 easy steps you can take to get a home loan even if you don’t have 20% down.

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Another Tip Before Moving Forward

Something that’s often overlooked as part of the home buying process is having good disability and life insurance policies in place. Your ability to pay for your home and student loans is dependent on you earning an income each and every month. If you became disabled because of an accident or illness and are unable to work, disability insurance will provide you with money to help replace your income. If you were to die unexpectedly, your mortgage will usually pass on to your spouse if he or she is on the loan. A strong life insurance policy could pay off the remainder of the mortgage or be enough so that your significant other could continue to make the monthly payments.

Ok. Now that you have your priorities in place and have done some due diligence, let’s explore some of the pros and cons of each of the strategies I mentioned above.

Strategy 1: Buy a Home ASAP

Let’s face it, a great deal of the decision to buy a home comes from your heart and not your head. Of course, you want to make a sound financial choice, and most homes are just that, but sometimes you also just WANT TO OWN A HOUSE.

My wife and I have owned our current home for a little over 4 years now. It’s very difficult to beat the feeling of security and peace of mind I have knowing that my daughters have a safe place to sleep every night. I never have the threat of a landlord deciding to sell the property, or raising the rent, or simply kicking me out with only 60 days notice. I can put effort into my home and enjoy the benefits of that effort. This is something that connects us to the property in a way a rental never could.

This strategy is for people who are looking for that feeling and are looking for it right now. You may also choose this strategy if you are someone who is confident in your housing market and feel that you can take advantage of the projected appreciation and resale opportunity.

There are some compromises of course if you choose this path. For starters, you may not have enough saved up for a full down payment. This means a larger mortgage payment in addition to paying private mortgage insurance (PMI), which will ultimately increase the total cost of the house. Depending on the size of the mortgage, you could put a strain on your budget making it harder to pay off other debts or to contribute to savings and retirement.

Also, if you pursue this strategy with very little equity, it could be very difficult to move if there was a dip in the housing market and your upside down and you owe more than the home is worth. Therefore, you have to be comfortable with this risk.

This strategy could definitely make sense if your student loan strategy involves one of the federal forgiveness programs, especially PSLF since you are anticipating having student loans for 10-25 years and will be making income-driven payments. Because there is a standard term to get the full benefits of forgiveness, it doesn’t make sense to make extra payments since you can’t accelerate the process.

If you choose this strategy, consider building a decent a down payment and a mortgage size that doesn’t cause too much stress on your monthly budget and make it impossible to make progress with your student loans and other financial goals.

Strategy 2: Pay off all student loans then buy a home

If the thought of your student loans makes you sick to your stomach, adding more debt by buying a home may be the last thing on your mind. This strategy focuses on paying off your biggest debts before adding more to your plate. This is the true Dave Ramsey philosophy and is a strategy for people who can handle delaying their gratification.

The advantage here is all about flexibility. You have the ability to move relatively easily if you experience a job change or life event. Renting requires far less in upfront costs compared to buying so you retain more flexibility in your budget for paying down other debts faster. The costs of renting are also much more predictable given you won’t have repairs or capital expenditures to worry about.

The tradeoff is you will miss out on the benefits of being a homeowner until later. Namely, building equity and tax benefits. Interest rates are also increasing at the moment and if trends continue, they could be significantly higher in just a few years. Missing out on a lower interest rate now could mean spending quite a bit more down the road. Plus, depending on the size of your student loans and potential mortgage it could take several years to clean that up and then save enough for a down payment.

Many people who follow this approach simply hate the idea of being indebted any more than they have to be or fear the possibility of defaulting on payments with a sudden change in income.

Strategy 3: The Hybrid Approach

The third and final approach attempts to mix the best aspects of the initial two. The basic philosophy is this: Pay off a portion of your student loans and lower your debt to income ratio, save up a sizeable down payment, and buy a home when you are more financially stable.

If you use this approach, what percentage of your student loans should take out prior to pulling the trigger on a home? It really comes down to what your comfort level is and how long you want to delay the homebuying process.

Similar to the last strategy, you will miss out on some of the benefits of being a homeowner for a period of time potentially missing out on market appreciation and locking in a lower interest rate.

Like strategy #1, this hybrid approach would definitely make sense if your student loan strategy involves one of the federal forgiveness programs.

Conclusion

Buying a house with student loans can certainly feel overwhelming. There are emotional and financial points to consider that are often at odds with one another. There are three basic strategies to consider and what works best for you will be dependent on your situation including your priorities, emotions, financial position, and risk tolerance.

Have more questions about buying a home with student loans? Nate Hedrick, the Real Estate RPh, is a full-time pharmacist and licensed real estate agent. Head on over to yourfinancialpharmacist.com/real-estate to get in touch!

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Defining and Calculating Discretionary Income for Student Loans

Posted on by yfpadmin

What is discretionary income?

You know that money left over after you pay your rent, food, and other bills?

Discretionary income is commonly defined this way and is often viewed as the money you have to go on vacations, buy luxury items, and others things that are non-essential such as Kate Spade purses (Although my wife would disagree).

However, discretionary income for student loans is defined a little differently and has a more specific, technical definition. This is really important because it ultimately determines your federal student loan payments for the income driven repayment plans.

From the federal government’s perspective, your discretionary income comes down to two things: your adjusted gross income and the U.S. poverty guidelines for your family size. Specifically, it is your adjusted gross income minus the poverty guidelines.

Calculating Discretionary Income for Student Loans

Adjusted Gross Income

Adjusted gross income (AGI) is your income reported on your individual tax return after specific deductions or adjustments have been made. These are sometimes referred to as above-the-line deductions. These include student loan interest, IRA contributions, tuition, moving expenses, alimony payments, and HSA contributions.

U.S. Poverty Guidelines

The U.S. poverty guidelines are set by the Department of Health and Human Services and help determine eligibility for certain federal programs. These are updated annually for inflation using the consumer price index. These guidelines are the same for all states with the exception of Alaska and Hawaii which have higher limits. If you live in either of those states you can find the guidelines here.

The specific income driven repayment plan will determine what percentage of the poverty guidelines is used in the calculation. For most plans including Pay-as-you earn (PAYE), Revised pay-as-you-earn (REPAYE), and Income-based repayment (IBR), it is 150%. For Income contingent repayment (ICR), it’s 100%.

Let’s do an example to determine a pharmacist’s discretionary income who is in the REPAYE repayment plan. We will assume an AGI of $120,000 and a family size of 2.

You can see that discretionary income for student loans will vary year to year based on changes in your income, the poverty guidelines, and family size. In order to determine how this impacts your monthly payments, we have to do a few more calculations.

Incorporating spousal income into this calculation will depend on the income driven plan and how you file your taxes. For REPAYE, spousal income will count toward AGI regardless of how you file. If you file separate income tax returns, then only your income will be counted under PAYE, IBR, and ICR.

Calculating Payments for Income Driven Plans

Your monthly student loan payments are calculated using a percentage of your discretionary income from the previous year. Therefore, if you are a first-year resident and had little to no income in your last year of pharmacy school, your payment under an income driven plan could actually be $0.

For most income driven repayment plans, your monthly payments will be 10% of your discretionary income. For the old IBR plan with loans borrowed before July 1, 2014, it’s 15%. ICR is sort of the oddball in the group. Not only is discretionary income calculated differently, the payment is also different from the other plans. It’s the lesser of 20% of discretionary income or what you would pay in fixed payments over 12 years. Once you multiply the percentage by discretionary income, dividing that number by 12 will result in your monthly payment.

If you want a shortcut and don’t want to do all the math you can use the studentaid.gov Repayment Estimator. While it will give you accurate payments based on your current income and family size, one of the limitations is that you cannot change these for different years. It has built-in assumptions that your income will grow by 5% each year and your family size will not change. So if you want to change these, you can just do another calculation or determine it manually.

In the case study below, Emily is single and works as a pharmacist at CVS. She is still trying to figure out her student loan payoff strategy but wants to start making payments so she chooses the income driven plan PAYE. Based on last year’s income and the current poverty guidelines for Ohio, her monthly student loan payments would be a little over $800.

No Longer Necessary to Recertify for Income Driven Repayment

Instead of having to recertify to stay on an income-driven repayment plan like before, borrowers can have their plans automatically renewed every year based on their tax return due to the implementation of the FUTURES Act. To stay in an income driven repayment plan, you will need to opt-in one time to allow the IRS to share your tax returns with the U.S. Department of Education. This eliminates the need to recertify your income annually.

If your income or family size changes throughout the year, you can make a request to have your payments recalculated. This can be a great remedy if you experience a financial hardship that results in a change in your income but you don’t want to apply for forbearance.

REPAYE Subsidy

Up to this point, I have discussed the factors that determine discretionary income and monthly loan payments under an income driven repayment plan but haven’t mentioned anything about student loan balances. That’s because in general, it does not factor into any of the plans. However, there are some circumstances in which it can have an impact. Since most pharmacists will have loans that are unsubsidized, I will focus on the REPAYE subsidy.

Depending on your loan balance, it’s possible that your monthly payment under REPAYE may not cover all of the interest that accrues in a month. That could be pretty depressing right? Fortunately, there’s a provision in the federal loan program that can help with that.

If you are in this position, the government will pay half of the remaining interest that is due on all unsubsidized loans. Let’s say you have $185,000 in unsubsidized loans at 7%. When you start paying your loans, the interest accrued in the first month would be approximately $1,079. Assuming you’re single with an AGI of $120,000 and live within the contiguous states, your monthly payment would be $840.50. Since this payment would not cover the total amount of interest accrued, the government would pay half of the difference which is ~$119.

The REPAYE plan can be a great option if you are a pharmacy resident and trying to survive on a limited income. When applying for income driven payments, you would likely be reporting an income of $0 or a very small amount depending on how much you worked during your last year of school, which could result in payments of $0. Under any other income driven repayment plans besides REPAYE, the interest on your loans would accrue at the full amount each month.

This is why choosing to defer or put loans in forbearance in residency could be a huge mistake because interest will also accrue at the full amount while in that status.

Public Service Loan Forgiveness and discretionary income

You may be wondering what income driven repayment plan is best for you. Unfortunately, there is no one plan that fits all and it can really depend on your student loan payoff strategy. It also depends on the type of loans you have and your overall financial situation.

If you’re pursuing the Public Service Loan Forgiveness (PSLF) program, it’s very important to understand your discretionary income and the different income driven plans. If you are all in with PSLF, one of your main goals should be to pay the least amount of money over 10 years. Remember, assuming you meet all of the requirements and make all of your 120 monthly payments on time, any balance remaining on your loans will be forgiven tax-free.

To accomplish this goal you want to first choose the right repayment plan which for most people will be REPAYE or PAYE since payments will be 10% of discretionary income. Second, knowing that AGI will determine how discretionary income is calculated, you want to look for ways to lower this.

Did you know that you can actually build wealth while simultaneously lowering your payments on your student loans? While this may sound like a scam, there’s actually a legal way to make this happen. You just have to take advantage of how the tax system is set up.

I discussed earlier that your adjusted gross income is determined after certain deductions are made. Some of these are retirement contributions or vehicles that allow you to invest. The first major one is contributions made to a Health Savings Account (HSA). If you have a qualified high deductible health plan, you can contribute up to $3,450 per year if you are single and $6,900 if you are married or have a family. While the name can be a misnomer, these contributions can be invested aggressively in things like index funds and exchange-traded funds (ETFs).

Another way to lower AGI is to contribute to a traditional Individual Retirement Arrangement or IRA. Currently, the max is $6,000 per year with an additional $1,000 if you are 50 or older. Unfortunately, many pharmacists will not be eligible to deduct this from their taxes since there are income limits. This completely phases out at a modified adjusted gross income of $75,000 for single and $206,000 for married filing jointly.

If you are self-employed, you may be eligible to contribute to a Simplified Employee Pension or SEP IRA. Depending on your income, you could significantly reduce your AGI given the limits are the lesser of 25% of your income or $57,000.

What you won’t find under the AGI section of the IRS 1040 form is contributions made to a 401(k), 403(b), or Thrift Savings Plan (TSP). That’s because this is actually reduced from the total income that you report on line 7 of the 1040 form. When you receive your W-2 from your employer, your total income will be your gross wages minus any traditional contributions you make. Keep in mind any Roth 401(k) contributions will not be deducted since you get the tax break when you make distributions at retirement age. For 2020, you can contribute up to $19,500 and an extra $6,500 if you are 50 or older.

You can see that there are some great tax-efficient ways to invest that also lower your AGI, ultimately lowering your student loan payments. So if the Public Service Loan Forgiveness program is right for you, make sure you take a look at these options.

Conclusion

Discretionary income for student loans directly determines your payments for income driven repayment plans. These can be a great option if you are struggling financially and don’t want to put your loans in forbearance but also the recommended option for the public service loan forgiveness program and non-PSLF forgiveness.

While in PSLF, you have the opportunity to lower your payments while building wealth by taking advantage of retirement accounts and other vehicles.

What is the best student loan payoff strategy for you and what repayment plan should you be in?

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21 Financial Moves Every Pharmacy Graduate Should Make

Posted on by yfpadmin

The following post contains affiliate links through which YFP receives compensation.

It took me about a year and a half after graduating from pharmacy school to finally start making good decisions to improve my financial situation. I had some bad spending habits, very little personal finance knowledge, and wasn’t taught good financial principles growing up. This resulted in some unfortunate financial mistakes early in my career.

Most pharmacy schools don’t have mandatory personal finance education, some offer elective courses, and some provide some basic information before you graduate. Therefore, it will largely be up to you to be proactive in making sure have a financial game plan.

Check out these 20 moves that every pharmacy graduate should make to get a good start.

Depending on your personal situation, you may not be able to work on all of these at once. The key is to get them on your radar so you can develop a good foundation.

1. Create Solid Financial Goals

When I graduated from pharmacy school, my main goal was to survive an intense residency program. I fully admit, I wasn’t thinking very much about my finances and I hadn’t set any goals. Looking back, this should have been a priority.

Consider having specific, measurable, and timely goals that have a strong purpose behind them and lay out the steps you are going to take to accomplish. I recommend that you actually write your goals down and tell your friends as research shows these additional steps can increase your rate of success. Here is the basic framework you can use:

By <date to achieve goal>, I want to <financial goal you want to achieve> so that <why you want to achieve the goal>. To accomplish this, I will <steps you will take to make the goal become a reality>.

Example

By December 31st, 2018, I will save $5,000 for an emergency fund so that I can avoid the stress and anxiety when an unexpected expense occurs.

Consider having goals around these areas: savings, net worth, debt payoff, and giving.

2. Develop a Budget

Many people associate a budget with living frugally, eating ramen, and shopping at thrift stores. The truth is that a budget is just a game plan on how you will spend your money and execute your goals. You plan for your expenses in advance and then direct your disposable income (or money left over after expenses) toward your financial goals.

Personally, having created and stuck to a unique budget every month for the past several years has helped prevent overspending, given me a sense of peace, and also kept me on track to achieve my goals. If you want an easy four-step process, check out our free budgeting template to get started. After getting your budget set up, consider using one of the budgeting software/apps to track your progress each month. Some of the popular ones out there include Mint, YNAB, Mvelopes, and Everydollar.

3. Set up an Emergency Fund

If you’ve never had an unexpected car, medical expense, or another emergency, it’s only a matter of time. Life happens and you better be prepared. Having a good chunk of cash on hand can mitigate emergencies that have the potential to derail your financial plan.

The textbook answer is to have 3-6 months of expenses saved in a liquid account like a simple savings account or money market account. Ally bank has a great rate of up to 1.00% APY (Annual Percentage Yield) for their savings account which is significantly higher than what most banks offer. The CIT Bank Savings Builder is another option for a high yield savings account that currently offers an APY of up to 0.75% and requires a minimum deposit of $100. There are no fees to open or maintain the account, however, to get the maximum APY you have to either maintain a balance of $25,000 or more or make monthly contributions of $100 or more.

Some argue that this is too much money to be earning interest rates that can’t even beat inflation. Find an amount you are comfortable with and one that allows you to reduce your dependency on a credit card to bail you out.

4. Eliminate Your Credit Card Debt

No one ever plans to go into credit card debt. It’s often the result of either overspending or unexpected medical events or emergencies. Having credit card debt is really a financial emergency in and of itself given the typical ridiculously high interest rates.

If you’re in this situation, you should make it a priority to get rid of it as soon as possible. You want to take advantage of compound interest and not have it work against you. Do you need an emergency fund in place? Would a budget help prevent you from overspending? Find a strategy that will help prevent it from recurring in the future.

5. Calculate and Track Your Net Worth

This is a quick way to analyze your financial health. Your net worth is your assets (things you own) minus your liabilities (debt you owe). As a new pharmacy graduate, this is likely going to be a large negative number thanks to student loans. However, don’t let that discourage you!

The goal is to make strides to increase your net worth by building your assets and paying off debt. The trajectory is more important than the actual current number. With apps like Mint or Personal Capital, you can quickly check your net worth if you have all of your accounts synced. Tim Baker CERTIFIED FINANCIAL PLANNER™ on the YFP team also has a great net worth tool that’s easy to use.

6. Get Long Term Disability Insurance

You put in a lot of time, energy, and effort to be able to become a pharmacist and make a good income. That’s why it’s so important to protect it. Disability insurance for pharmacists is really income insurance. It provides you with money in the event that you become disabled and are unable to work. Personally, I have known pharmacists that have been unfortunately out of work for months to years because of head trauma and autoimmune diseases. What would happen if you were suddenly unable to work because of an accident or illness? How would you support yourself or your family?

Compared to other types of insurance, long-term disability insurance for pharmacists can be more expensive depending on your health status and coverage options. But can you afford not to have it? You may have a policy through your employer but many times they are not as robust a private policy and may not offer own occupation coverage.

You can learn more by checking out our disability insurance page. When you are ready to shop around for a policy, check out Policygenius, an online broker we recommend where you can quickly shop multiple reputable companies to find coverage that’s right for you. They have a very user-friendly interface and offer incredible service.

7. Develop a Student Loan Payoff Strategy

86% of pharmacy graduates borrowed money to pay for school and the average student loan debt is now over $160,000. With debt loads continuing to rise and salaries being somewhat stagnant compared to inflation, you need a solid strategy to tackle your student loans.

If you’re lucky enough to work for a company or institution that offers a tuition reimbursement/repayment program, this should be your first strategy to consider. There are some well-known federal programs offered by the government and military and some state programs, too. Beyond these, your options are to pursue loan forgiveness through the Public Service Loan Forgiveness Program or forgiveness after 20-25 years or to pay them off in full.

If you’re not pursuing forgiveness and don’t need an income-driven repayment plan, a great option can be to refinance student loans. Reducing your overall interest rate by 1% could result in thousands in savings. You can even get a nice bonus up to $800 through one of our partner companies. If you need help finding the best strategy, you can take our free student loan quiz or download our Quick Start Guide.

8. Start investing in your company’s 401(k), 403(b), or TSP

When you’re flooded with student loans and other debt, it can be hard to balance other goals such as investing. While you may feel you can put off retirement savings for a few years, the reality is that you want to take advantage of compound interest, and the earlier you start contributing, the better.

Many companies offer a match program where they will put in a dollar amount equal to your contribution up to a certain percentage, such as 5%. This is essentially “free” money. For most people, taking the match is going to be the best play, even while paying off student loans. Beyond the match, how much you contribute to your retirement savings plan depends on your financial goals.

9. Get Liability Insurance

Even as a highly trained professional, mistakes can happen which could jeopardize your license and even your career. If you work for an employer, they likely offer some protection if you’re functioning within your scope of practice. However, their main concern is protecting the organization, not you.

Besides actual damages, liability or malpractice insurance can help cover litigation costs, costs for representation for the board of pharmacy hearings, and lost wages. Coverage is relatively inexpensive (~$12-$20/month). Proliability, Pharmacist Mutual, and HPSO offer policies for pharmacists up to $1 million in liability coverage per incident and a $3 million aggregate limit.

10. Get Term Life Insurance

Not everyone needs life insurance, but, if you have a family that depends on your income or someone would be responsible for your debt if you pass, you should have a policy in place. There are two major types of life insurance: term life insurance and permanent. Term is the way to go for most people because it’s less expensive and not flooded with fees.

The amount of coverage required will depend on your needs including existing debt, income support, and future expenses. Future expenses include things like funeral costs, childcare, and college tuition. Check out Episode 44 of the YFP podcast for more information on figuring out your life insurance needs. You can get a free quote in two minutes through Policygenius without putting in your personal information.

11. Set up a Health Savings Account (HSA)

If your employer offers a high deductible health plan (HDHP), then you’re eligible to contribute to an HSA. This can be a good option, especially if you’re relatively healthy and rarely use health insurance because your premiums will generally be lower than traditional plans.

An HSA allows you to save money pre-tax into an account designated for health expenses. But, here is the best part, it doesn’t have to stay in a savings account. The money can be invested aggressively just like an IRA. Furthermore, these accounts grow tax-free and distributions can be taken tax-free if used for qualified medical expenses.

However, you don’t have to use the money for medical expenses that occurred in the same year. You can reimburse yourself for medical expenses that you paid out of pocket in previous years. For 2019, you can contribute up to $3,500 per year if single and $7,000 if married or have dependents.

12. Start Contributing to an IRA

Like a 401(k) or 403(b), an IRA or Individual Retirement Arrangement is another great way to save for retirement in a tax-efficient manner. This is something you set up on your own outside of your employer through a mutual fund company or brokerage firms such as Vanguard or iShare.

While your investment selection will vary based on your personal situation, consider using low-cost index funds or exchange-traded funds (ETFs). You can do this completely on your own or use a robo advisor where portfolio options are already established and your asset allocation is automatically rebalanced.

Meeting with a financial planner to help you choose investments and your overall portfolio is another great option. You can set up a free discovery call with YFP Director of Business Development, Justin Woods, PharmD, MBA to learn about how YFP Planning can support your investment strategy.

You have the option to contribute to a traditional IRA, Roth IRA, or a combination of both. Contributions to a traditional IRA can lower your taxable income, but you likely won’t be able to take advantage of that benefit if your adjusted gross income is $63,000 if single and $101,000 if married filing jointly.

Although you may not be able to contribute to a Roth IRA directly because of income limits, you can contribute to a traditional IRA and convert to a Roth (known as backdoor Roth IRA). Any gains prior to the conversion will be taxed. For 2020, the contribution limit is $6,000 per year.

13. Get a Will in Place

This is probably one of the last things on most people’s financial to-do lists but it’s something you don’t want to overlook. Having a will in place will ensure your property goes to whoever you decide, give you the ability to name an executor who will enforce your will, and to name a guardian for your children if this applies. If you die without a will in place, this will be decided by probate court according to your state’s laws and regulations.

Along with a will, you want to have a living will which is also called a health care declaration or an advanced directive. This outlines how you would receive medical care and who you want to make decisions in the event that you are incapacitated. Depending on how complex your estate is, you may want to hire an attorney to help. Otherwise, you can download state-specific estate documents for free or at a very low cost from many sites.

14. Get Clarity on How to Get Raises or Promotions

Your raises will typically be based on time worked, merit, or a combination of both. If you can increase your salary through achievements, do you know exactly what those are? Some organizations will give raises if you obtain board certifications or other medical credentials.

What about publications, presentations, or positions within state and national pharmacy organizations? If you are already doing things to promote and advance your career, knowledge, and experience, you should definitely take advantage of the financial benefits if available.

15. Set Your Withholdings to Break Even

When you first start working for an organization, you will fill out an IRS W-4 form. This tells your employer how much in federal taxes to withhold on your paycheck and is designated by a number.

The lower the number, the more money they withhold. To maximize your net pay every month without owing a tax bill, you will need to determine the optimal withholding based on your projected income and deductions. If your taxes are relatively easy, you can figure this out using the IRS Withholding Calculator. Otherwise, consider seeking the help of an accountant. You can adjust your withholdings multiple times throughout the year if needed.

16. Consider Hiring a Financial Planner

Having a good financial planner on your team can help you achieve your goals, manage your investments, and put together a comprehensive plan. Beyond the financial benefits, a planner can give you peace of mind knowing someone is looking out for you. The key is finding someone you can trust that has your best interest in mind.

While there are many types of financial planners and advisors out there, consider a Certified Financial Planner (CFP®). They have the most rigorous education requirements including thousands of hours of experience. Be sure they do comprehensive financial planning and not just investment management (unless that’s all you’re interested in). The team at YFP Planning works virtually with pharmacy professionals across the country for one-on-one fee-only, certified financial planning. You can set up a free discovery call to see if YFP Planning is a good fit for you.

17. Start Educating Yourself

Before graduating from pharmacy school, I received about two hours of financial information. Since I didn’t make it a priority to learn about money while in school and didn’t have any good examples to follow, I had a very weak foundation. That resulted in some big mistakes in my first year and a half as a practicing pharmacist.

You don’t need a master’s degree in finance to be successful with money, but you should have the basic knowledge that helps you make good decisions and develop good habits. Some of the YFP team’s favorites include Money: Master the Game and Unshakeable by Tony Robbins, and The Millionaire Next Door by Tom Stanley. If you want more education that is focused on pharmacists, check out our book Seven Figure Pharmacist: How to Maximize Your Income, Eliminate Debt, and Create Wealth and the YFP Podcast.

18. Consider a Side Hustle

Side hustles are ways to make extra cash beyond your full-time job. This could be moonlighting at another pharmacy or hospital or could be something completely outside of your training. Having an additional stream of income can help you achieve your goals faster and reduce the risk of relying solely on your main job.

If you want some ideas, check out this post 19 Ways to Make Extra Money as a Pharmacist in 2020. You can also check out the podcast as we frequently have pharmacists on the show who talk about side hustles they started.

19. Set up Systems to Avoid Lifestyle Creep

Lifestyle creep is one of the biggest threats to a pharmacy graduate. This is when your expenses meet or exceed your income no matter how much you earn. With incomes starting out high, there is a tendency to get comfortable and maintain a certain lifestyle.

Spending the majority of your money on things that bring you pleasure and happiness today and the need to compare yourself to those around you are the main contributors to lifestyle creep. So you have to protect yourself from yourself. Many pharmacists have recommended, “living like a student” for the first few years following graduation. This is a great way to avoid upgrading your lifestyle and making large purchases too quickly.

Another strategy is to automate your contributions toward savings and investments so you never “see” certain money. If you can divert a percentage of income before it hits your checking account, you won’t be able to spend it. Increasing your savings in step with your raises is another great way to prevent lifestyle creep.

20. Connect with the Your Financial Pharmacist Facebook Group

Surrounding yourself with people on the same journey is a great way to help you achieve your goals. We have some great discussions on the Facebook group and you can post your own questions at any time. Join over 7,000 pharmacists and students for some extra motivation and inspiration by clicking here.

21. Use a high-yield savings account or money market account for big purchases

When you consider inflation, money sitting in regular checking or savings accounts can lose a lot of purchasing power over time given most interest rates are essentially next to nothing.

Sure you avoid market risk or the risk of keeping cash in other investments but there are other options that are less risky and can yield at least some return. These include high yield savings accounts and money market accounts.

If you are sitting on a bunch of cash that’s for an emergency or you are saving for a big purchase such as a car or home within 5 years or less, these can be good options to earn a little extra money. Now if your savings amount is relatively low and you aren’t adding anything to it then it may not be anything substantial, but remember it’s better than 0.001%.

I did a review of my experience with CIT Bank which offers competitive interest rates from 0.85-1.40% for their high yield savings and money market accounts.

Financial Planning for Pharmacists

While these are some great tips to get you started on your journey, everyone has a unique situation. Whether you want to pay off your student loans, make the right investment decisions, or simply build a solid financial plan, YFP Planning can help you get your income working for you (rather than the other way around). YFP Planning offers fee-only financial planning for pharmacists. You can book a free discovery call to learn more!

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8 Situations When You Shouldn’t Refinance Student Loans

Posted on by yfpadmin

The following post contains affiliate links through which YFP earns a commission.

Some posts have been floating around Linkedin recently that basically said:

“Pharmacists Should Never Refinance Student Loans!”

Never is a strong word…and sometimes it works.

Such as:

Never drink and drive
Never go in the sun for a prolonged period of time without protection
Never try to eat a whole pizza before playing pick-up basketball without getting sick (I have tried this once and failed)

However, saying pharmacists should never refinance student loans is like saying someone with type 2 diabetes should never use insulin. It just doesn’t hold up.

The truth is that refinancing can be a powerful strategy to tackle your loans and can help you save a lot of money in interest. But, it’s not the best option for everyone.

Here are some situations when you should not refinance your loans.

1. You’re Pursuing Public Service Loan Forgiveness

If you work for a government organization, tax-exempt 501(c)(3) company, or a non-tax exempt non-profit (that meets qualifications), then you are eligible for the Public Service Loan Forgiveness program. This would apply to all VA and military pharmacists in addition to many working for hospitals. After making 120 qualifying payments on Direct Loans over 10 years, you can get the remaining balance of your loans forgiven. Not only are they forgiven, but they are forgiven tax-free!

Although there’s a lot controversy surrounding this program, you can’t ignore the math. Consider a single new grad that starts working for a non-profit hospital with a starting salary of $123,000 and loan balance of $160,000 with a 7% interest rate. Under the 10-year standard repayment plan, this pharmacist would pay $1,064 per month and a total of $383,214. However, if the new grad is in the PSLF program making 120 income driven payments that range from $874 to $1,404 through the PAYE repayment plan, the total amount paid would only be $134,564.

Refinancing your loans when you’re eligible for PSLF could be a $250,000 mistake. For more information on the PSLF program check out episode 18 of the podcast.

2. You’re Seeking Forgiveness After 20-25 Years

Did you know that you can get your federal loans forgiven after making payments for 20-25 years? This is another strategy to get rid of your loans outside of the public service loan forgiveness program. With non-PSLF forgiveness, there is no employment requirement. However, you must have Direct Loans and make qualifying income-driven payments every month for 20 years under the PAYE or IBR new repayment plan or 25 years through the REPAYE plan. In addition, you will be taxed on any amount forgiven after that time period which is one key difference from PSLF. This strategy typically works best for someone with a very high debt to income ratio (such as 2:1 or higher). Just like PSLF, you cannot refinance your loans or you automatically disqualify yourself from the program.

3. You Anticipate a Reduction in Your Income

One of the biggest benefits of the federal loan program is the ability to temporarily stop making payments either through deferment or forbearance. If you’re faced with unexpected medical expenses or other financial difficulties, getting a break on your student loan bill can be a welcomed short-term remedy.

While many life situations could affect your income and arrive unexpectedly, there are some that you may see coming. For example, do you plan on making a job change or transition that would result in a gap in employment? Do you plan on having a family or have a spouse or significant other that will be stepping away from work to take care of children? If one of these life events is on the horizon, you may want to hold off refinancing as not all companies offer a forbearance program.

Another situation where it could be tough to commit to refinancing is if you have variable income. While most pharmacists will have some base salary, you could have variable income especially if you own your own business. Maybe most months you could make the payments per the proposed refinance terms but what if you have a bad month? If your loans are in the federal system you can make income-driven payments and also have the option to temporarily put your loans in forbearance. This could be a huge benefit and may not be worth giving up.

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4. You Can’t Get a Better Interest Rate

I think this one is kind of a no-brainer, right? Why would you refinance your loans if it doesn’t save you money? In some cases, people could be enticed by cash bonuses to refinance their loans, and, yes, it can be a quick way to get a few hundred bucks. However, if you’re not saving money over the course of the loan in interest, then it really doesn’t make sense to refinance.

If you can’t get a lower rate you should figure out why. You may already have a very competitive rate that can’t be beaten especially if you refinanced once already. If you still have federal loans and can’t get a lower rate, it may be because of your credit score or that you have a very high debt to income ratio.

Just because you can’t get a better rate today doesn’t mean this will be the case in the future. Because interest rates and your financial situation can change, consider rechecking in a few months if you’re confident that refinancing is a good move.

5. The Refinanced Terms Would Compromise Your Budget

The shorter the refinanced term, the lower the interest rate will be most of the time. While some people refinance their student loans to lower their monthly payment, you could actually significantly increase your payment depending on your current repayment plan. For example, let’s say you just started making monthly payments of $1,857 under the 10-year standard repayment plan for a balance of $160,000 at 7% interest. If you refinance to a 5-year term with a 5% interest rate, your monthly payment would go up to $3,019. Depending on your situation, that could be a tough payment to pay every single month making it difficult to cover living expenses and allocate money toward your other financial goals.

Being aggressive and paying off your loans quickly can be a great move, but if it compromises your budget and puts you in a vulnerable position, it may not be the right time to refinance. If the only way to get a better interest rate is to choose a shorter-term that results in tight monthly payments, consider paying down the loan first and then revisit the option to refinance when the payments would be more manageable.

Here is a calculator to see if the terms would make sense in your situation:

6. You Can’t Get Approved by a Reputable Company

Unfortunately, several companies have been found guilty of student loan scams and have questionable business practices. In fact, I have personally seen this as my wife was sent letters that looked very enticing but were definite scams once you read the fine print.

If you do refinance, make sure it’s with a company you can trust. You check out the Better Business Bureau which sets the standard for marketplace trust. You can search companies, check their ratings, and read reviews and complaints made.

If a company is asking for a fee upfront prior to refinancing, this is a major red flag and could be a scam. It’s a very competitive market and many companies offer a nice cash bonus for your business since you will pay them money in interest over the term of the loan.

Besides an origination fee, make sure there is no prepayment penalty. Refinance companies make the most money from you if you carry your loan to the full term. However, if you want to be aggressive and pay your loans off sooner than the term, there should be no fee or penalty. Most reputable companies do not have a prepayment penalty if you choose to pay off your loans early. If you want to see your savings by making extra monthly payments or a one-time lump sum payment on your student loans or other debt, check out our early payoff calculator.

7. You Don’t Have Adequate Life and Disability Insurance

Not all refinance companies discharge your loans if you die or become disabled. This is one of the protections you could lose if you move your loans out of the federal system. If you die without this protection, your executor will have to pay off the debt from your estate prior to your beneficiaries receiving any of your assets. If you become disabled and can’t make the payments, you will likely be sued by the company to recoup the remaining balance.

Be sure to know what the terms are before you commit. You can check out a detailed view of the six lenders we partnered with to see which ones will discharge your loans on death or disability here.

If you choose a company that doesn’t have this benefit because they offer better rates, then you should have these policies in place. You can quickly get free quotes from multiple companies with Policygenius, an online independent broker that has an easy-to-use interface with outstanding customer service.

8. You Have Federal Loans That Are Included in the CARES Act

Under the CARES Act, payments for qualifying federal loans will be suspended through December 31, 2022, and this should be done automatically by your servicer without having to make any requests. Qualifying loans include:

Direct Federal Loans (Direct Subsidized, Direct Unsubsidized, Direct Consolidation Loans)
Federal Family Education Loans (FFEL) and Perkins Loans owned by the Department of Education

In addition to payments being suspended, no interest will accrue during this time. Because of these benefits, refinancing is not a good move in general during this time. That’s because private lenders are not likely going to offer the same relief which could be problematic especially if your income has been affected. For more information, check out this post 9 Financial Questions Pharmacists Need to Answer During the COVID-19 Pandemic.

When none of these situations apply and you’re committed to taking down your loans, refinancing is a powerful strategy and can save you thousands in interest.

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How to Leverage Opportunities as a Student to Gain Financial Freedom

Posted on by yfpadmin

The following post is authored by Tim Frost, PharmD and brought to you by the American Pharmacists Association (APhA). Your Financial Pharmacist has partnered with APhA to deliver personalized financial education benefits…exclusively for APhA members. You can learn more about APhA and the benefits of becoming a member by visiting www.pharmacist.com/join-now. Use the coupon code AYFP18 for 20% off your membership!

Do you ever reflect on the decisions you’ve made throughout life and how each respective decision plays out over time? In his Stanford University commencement speech Steve Jobs said, “You can’t connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future…” As I continue to the finish line of my postgraduate fellowship year, I often reflect on my college experiences and the subsequent impact they have made on my life and pharmacist career opportunities.

I started college with a number of personal goals: graduate, create lifelong friendships, maintain personal morals, and increase self-awareness, among many others. Looking back and connecting the dots, one of the most valuable goals I set was to limit student loan debt and increase financial opportunities. Perhaps one my best financial decisions was choosing an affordable institution for education, but I would be remiss to not share with you a few college decisions that have played out over time to increase my financial freedom.

Triple-down on work in the summer and holidays

Let’s be real, nobody in their right mind looks forward to a 4am alarm during summer break — I certainly didn’t. From the beginning of fall semester to the final exams in the spring, I dreamed of a relaxing vacation or at minimum a few days of Netflix binge. However, the pragmatic fears of student loan debt and looming tuition payments quickly snapped me back to reality. From my freshmen year until post doctorate graduation, I spent my summers and holidays working multiple jobs. I regularly worked 90-100 hours, starting my early mornings merchandising for the Coca-Cola Company and finishing my night as a pharmacy intern at ProMedica Toledo Hospital. My summer and holiday work habits played a critical role in both graduating with my bachelor’s degree without any student loan debt and providing ample financial cushion for the difficult workload and exam weeks.

Take your financial education as serious as your professional education

Anyone who has lived through the grind of pharmacy school has at some point chosen to take on a history of jazz or an introduction to [insert random topic] style class as a means to: 1) complete your undergraduate and professional electives; and 2) take your mind off anything pharmacy related and just breathe. Three of the most beneficial courses I chose were related to economics, accounting, and financial planning. While these courses didn’t grant me a “financial guru” status, they gave me a solid foundation to continually build on in the future. Even if your college of pharmacy doesn’t have baseline business and finance prerequisites to graduate, I would recommend unequivocally you strongly consider the financial educational opportunities offered at your respective institution.

My most memorable college financial education experience came from an APPE rotation in a community pharmacy. As with previous rotations, I walked in on day one hungry to get involved with a passion to learn and a drive to implement meaningful change. After meeting the pharmacy staff and getting a brief tour of the pharmacy, I was caught off guard when my pharmacist preceptor stated, “My goal for this rotation is to teach you everything you need to know about community pharmacy, but more importantly teach you how to be financially successful no matter what practice setting you decide to pursue.” We spent an hour per day discussing the in’s and out’s of student loans, budgeting, home ownership, life insurance, disability insurance, 401K investments, Roth IRA’s, among others. I’m confident in saying the financial education he invested in me will pay dividends for the rest of my life.

Network, Network, Network

An often overlooked undefined category in the asset column for everyone is the impact your personal professional relationships can play on creating, maintaining, and securing financial freedom. The first networking step for me was getting involved with my college APhA-ASP chapter and attending a patient-care project event. I made one meaningful connection that day, and the power of that one relationship changed everything for me. I financially invested in myself to attend every APhA conference I could afford while in pharmacy school — Region IV MRM, APhA Summer Leadership Institute, APhA Annual, and APhA Institute on Alcoholism and Drug Dependencies, among others.

Over time, the relationships compounded and I found myself engaging with the key thought leaders in the profession. In his book Never Eat Alone, Keith Ferrazzi states, “By giving your time and expertise and sharing them freely, the pie gets bigger for everyone.” What started as a hello and introduction, grew into opportunities for me to recognize my networks needs and subsequently bring value to them. Those leaders returned value exponentially by connecting me with their network or offering unique APPE rotations, research publications, and career positions. While my financial portfolio begins to grow, I have found my social professional relationship portfolio is the greatest asset of capital I own.

About the Author:

Timothy Frost, PharmD is a graduate of The University of Toledo College of Pharmacy and Pharmaceutical Sciences. He currently serves as the first Pacific University School of Pharmacy and Oregon Board of Pharmacy Regulatory Affairs and Academia Fellow in Portland, OR.

Pictured above (left to right): Jordan Long, PharmD, Tim Frost, PharmD and Deeb Eid, PharmD at the 2016 APhA Annual Meeting in Baltimore, MD

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The Top 3 Reasons Why Pharmacists Should Refinance Their Student Loans

Posted on by yfpadmin

If you’re like most pharmacists, student loans will be your biggest expense aside from a mortgage, and a major barrier to achieving financial freedom.

Other than some of the forgiveness and tuition repayment/reimbursement programs available, dying, or becoming permanently disabled, you’re pretty much stuck paying them off.

If your goal is to pay off your loans as fast as possible, you essentially can do one of two things to accelerate the payoff: increase your income and/or decrease your expenses to make bigger payments.

While these strategies are powerful and arguably most important, there’s another tactic that can help: refinancing

When you refinance your student loans, you change the terms of the loan which could be the interest rate, type of interest rate, time to repay, or a combination of those.

While refinancing can be a good move, it’s not for everyone. If you’re pursuing or plan to pursue the Public Service Loan Forgiveness (PSLF) program you will automatically lose your eligibility if you refinance.

Also, if you need an income based repayment plan, can’t get a lower interest rate, or can’t make big monthly payments based on the new terms, then refinancing probably isn’t the best move right now.

However, if that doesn’t apply and you’re thinking about refinancing, here are the top reasons why you should.

Big Potential Savings

Pharmacy graduates are now facing an average student loan debt of $160,000.

If that’s paid back over a 10 year period with a typical federal interest rate of 7%, the amount paid in interest would be $62,928. Ouch!

Let’s look at what the savings would be if the loan was refinanced to a 3% or 5% interest rate and the loan is paid back over 10 years.

Refinancing to a 5% rate results in a $11,000 savings but a 3% rate results in over $30,000 in savings!

What if you want to be aggressive and knock out the loan in 5 years.

You can see the savings between interest rates isn’t as big the faster you pay off the loans but it’s still pretty substantial and the overall interest paid is significantly less than the total over 10 years.

If you want to calculate your potential savings with a new interest rate and time to payoff, you can check out our free student loan refinancing calculator.

Catalyze Your Payoff

When I refinanced my student loans a couple years ago my minimum payment went from about $1,000/month to $2,700/month. While some people refinance their loans to lower their monthly payment, I almost tripled mine.

In order to get the best interest rate, I had to refinance to a 5 year term resulting in that big monthly payment. However, that wasn’t the only reason for this move.

I wanted to get rid of my loans as fast as possible and wanted to eliminate one of the biggest barriers to my progress: myself.

When my monthly payments were $1,000, I had some disposable income in my budget and could have paid extra on the loans. But do you think I did that each and every month? Of course not. I spent it!

Being forced to make $2,700 monthly payments on auto-draft minimized the opportunity to spend money on things that were not consistent with my big financial goals. Refinancing jump started my payoff and forced me to be intentional.

If you’ve been making monthly payments through one of the income-based or extended plans you may have no trouble making your minimum monthly student loan payment but you also may not be making much progress. Refinancing can help you get focused and serious about paying off your loans.

Cash Bonus

Beyond the savings in interest you can get from refinancing, many companies also offer a cash bonus just for being a new customer. Obviously, they make money off you from the interest you pay over time but it’s a great perk and better than paying a fee for the service.

We have partnered with some reputable refinancing companies that offer great cash bonuses. Full disclosure here. We get a small amount when you refinance using one of our links but we have negotiated to make sure most of the bonus goes to you.

You can see the offers below or on our refinance page. Checking your rate does not affect your credit and takes just a few minutes. I would recommend checking them all to see the best rate you can get.

Even if you refinanced in the past, you can do it again, and could be a good move if you can get a better rate.

[vc_custom_heading text=”Check out these companies to find the best interest rate. ” font_container=”tag:p|font_size:28|text_align:center|color:%23343341″ google_fonts=”font_family:Montserrat%3Aregular%2C700|font_style:700%20bold%20regular%3A700%3Anormal”][mk_custom_list margin_bottom=”10″ align=”center”][/mk_custom_list][vc_custom_heading text=”If you refinance student loans using one of the links below we’ll both get a bonus. We take just a small amount to make sure you get the highest bonus possible. Checking your rate will not impact your credit score. ” font_container=”tag:p|font_size:21|text_align:center|color:%23343341″ google_fonts=”font_family:Montserrat%3Aregular%2C700|font_style:700%20bold%20regular%3A700%3Anormal”][mk_padding_divider size=”25″][vc_separator color=”custom” border_width=”6″ el_width=”10″ accent_color=”#343341″][mk_padding_divider size=”25″]

Credible Disclosure: To check the rates and terms you qualify for, Credible or our partner lender(s) conduct a soft credit pull that will not affect your credit score. However, when you apply for credit, your full credit report from one or more consumer reporting agencies will be requested, which is considered a hard credit pull and will affect your credit.

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How One Pharmacy Student Accrued Only $20,000 in Debt Over 8 Years in School

Posted on by yfpadmin

By Tim Ulbrich, PharmD
YFP Founder and Co-Author, Seven Figure Pharmacist

The following post is from an interview I conducted with Kristopher Gillespie, BSPS, regarding how his involvement in the Army will result in graduating from pharmacy school in 2018 with very little student loan debt! Kris is a PharmD Candidate (Class of 2018, University of Toledo College of Pharmacy & Pharmaceutical Sciences.

Question: Kris, tell us a little bit about yourself and your military service leading up to attending pharmacy school.

Answer: I am currently 28 years old, married with 2 children, both boys, and in my last year of pharmacy school. I graduated high school in 2006 and decided to join the Army right after high school. I joined the Army as a 68Q or a pharmacy technician. After completing basic training, I went to Fort Sam Houston, Texas to complete my Advanced Individual Training (AIT) school, aka pharmacy tech training. After completion I was stationed at Fort Bragg, North Carolina where I worked in a hospital on base in the inpatient, outpatient, and a compounding/supply pharmacy over a period of about 4 years. I completed 5 years of active duty and then another 1 ½ years in the Army Reserve. I was never deployed so all my training and experience came from the hospital I worked at.

Question: Kris, you are on the path to do what very few pharmacy students have been able to do…accrue a VERY LITTLE amount of student debt. How were you able to do this?

Answer: One of the best benefits in my opinion of being an active duty soldier is that you can take 1-2 classes per semester from a distance learning center or main campus (if one is close enough) and the Army pays the tuition. All you have to do is buy the books. I finished 31 credit hours of classes while on active duty usually taking 2 classes at a time. My AIT and Army experience gave me another 31 elective credits. After I finished my 6.5 years in the Army I decided to go to school full time. The Army GI bill pays for 4 years of school so I had to complete and pay for 1½ years of undergraduate (since this was the cheapest tuition) and then I could use this benefit for the 4 years of pharmacy school. So I actually have just over $20,000 in student loan debt after going to school for around 8 years.

Question: While you were serving in the Army right out of high school, when did you realize you wanted to go to pharmacy school and how did you make that switch?

Answer: I was about 4 years into active duty working in my hospital outpatient pharmacy and I realized that there was only so much I could do as a pharmacy technician. I wanted to be able to answer the patients questions but couldn’t due to lack of knowledge or federal law prohibiting me (as the technician) from counseling. This thirst for knowledge was my primary motivation for wanting to go to pharmacy school. Since the Army does not have a pharmacy school program, you have to finish your time that you signed up for and get out of the Army before going to school full time. I ended up signing up for the Army reserve as my wife was in college at the time and that was how much longer she had left to get her bachelor’s degree. We essentially swapped roles, which for us worked out well.

Question: What are the requirements from the Army in terms of active duty to get professional school tuition paid for? What requirements do you have to fulfill after graduating from pharmacy school and for how long?

Answer: As an active duty soldier, all you really need is your chain of commands approval to start taking classes. This means not getting into trouble, show up when and where you are supposed to, and just doing what you are told. In my experience, it was not hard to get enrolled in classes; it was just learning time management and learning that the program existed! I still had to work 8-10 hours a day five days a week at the hospital and then I went to evening classes 2-3 times a week. The Army has a program called GoArmyED which has a website for soldiers to use to find schools that partner with them. Through their website you enroll into classes and they pay for the tuition. Since I had to get out of the Army before I could go to school full time, I actually no longer have a commitment to the Army after graduation.

Question: While you made the decision right after high school to join the Army, I’m assuming some pharmacy students reading this are considering this option while in pharmacy school. Is it too late? How about those that already graduated? Do they still have the option to go into military service and be eligible for loan forgiveness?

Answer: It is never too late, but I have to stress that it is definitely not for everyone. It takes some resilience and a strong motivating quality to make it through whatever commitment you sign up for. If you have already started pharmacy school I would suggest finishing pharmacy school and enlisting after graduation and taking advantage of the loan forgiveness programs. These amounts are always changing based on the amount of pharmacists the Army needs at the time. Remember that the contracts are a negotiation and if you do not like what they are offering you can walk away. For example, I was originally told that they only had 7-year contracts for pharmacy technicians. I told them that I was not prepared to sign up for 7 years of active duty and that I wanted a lower number. After talking to his manager and looking at my ASVAB score (test taken prior to enlistment kind of like an ACT or SAT) he got my contract lowered to 5 years of active duty. As a pharmacist, you bring a lot to the table so get what works best for you.

Now while in college, it might be best to look into ROTC (Reserve Officers’ Training Corps). You can get scholarships based on an agreed upon contract and most importantly it gives you a preview of the Army. You do different training exercises, attend different events, work out and take the Army physical fitness test, etc. Now, with the ROTC program they will help pay for school but there will be in the contract how long you have to serve on active duty post-graduation. The nice part with being a pharmacist is that you jump straight to captain (O-3) after finishing OTS (officer training school, this is like basic training but for officers). Now this means that you will be in a leadership position at your first duty station. So you will be in charge of an inpatient pharmacy, maybe a clinic, or wherever the Army has an opening for an active duty pharmacist. From my experience, active duty pharmacist got moved around every 2-3 years, either deployed or just to another duty station. Like I said, it’s not for everyone so just make sure you ask questions and know what you are getting into. Recruiters lie and typically do not know much about the medical side of the Army. My recruiter did not even know that the Army had pharmacy personnel. Make sure you talk to someone who “specializes” in recruiting pharmacist/medical personnel.

Question: Knowing most graduates are facing approximately $160,000 in student loans when coming out of school, what do you think graduating with only $20,000 (or so) of debt from pharmacy school will mean for you and your family going forward? Would you do it all over again?

Answer: For my family, this means that we are able to start saving more for retirement, and put more money into my sons’ 529 savings accounts for college. I believe that saving for the future is of vital importance, so the earlier I can start the better. I would absolutely go back and join the Army again. The experiences that I had made me more out going, gave me leadership qualities, and since I was smart with my money they set me up to be financially stable. Everyone in the pharmacy world says, “Find something to set yourself apart from the rest of your classmates”. My experiences in the Army have definitely given me plenty of ways to separate myself from my classmates.

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What is a 529 Plan?

What to Consider Before Starting a 529 Plan

Conclusion

Need help determining how to best save for your child’s education?

10 Financial Benefits for Federal Pharmacists You Wish You Had

1. Federal Employment Retirement System (FERS) Annuity

FERS Retirement Calculator

2. Access to the Thrift Savings Plan

3. Life Insurance

4. Long-term Disability Retirement Benefits

5. HSA Eligibility

6. Paid Parental Leave

7. Raises for additional credentials and board certifications

8. Opportunity to Pursue PSLF

9. Tuition Reimbursement and Repayment Programs

10. Generous Leave Structure

Conclusion

Need Help With Your Financial Plan?

1. You don’t have an emergency fund

2. You’re facing a crisis or major life event

3. You’re seeking loan forgiveness

4. You’re receiving tuition reimbursement/repayment

5. You have credit cards or other debt with high interest

6. You feel you can get a better return on your money somewhere else

Conclusion

Buying a House with Student Loans

Three Strategies for Buying a House with School Debt

Renting vs Buying

Are You Ready?

Know Your Budget

Debt-to-Income Ratio (DTI)

Credit Score

Down Payment

Consider a Professional Home Loan

Another Tip Before Moving Forward

Strategy 1: Buy a Home ASAP

Strategy 2: Pay off all student loans then buy a home

Strategy 3: The Hybrid Approach

Conclusion

What is discretionary income?

Calculating Discretionary Income for Student Loans

Adjusted Gross Income

U.S. Poverty Guidelines

Calculating Payments for Income Driven Plans

No Longer Necessary to Recertify for Income Driven Repayment

REPAYE Subsidy

Public Service Loan Forgiveness and discretionary income

Conclusion

1. Create Solid Financial Goals

2. Develop a Budget

3. Set up an Emergency Fund

4. Eliminate Your Credit Card Debt

5. Calculate and Track Your Net Worth

6. Get Long Term Disability Insurance

7. Develop a Student Loan Payoff Strategy

8. Start investing in your company’s 401(k), 403(b), or TSP

9. Get Liability Insurance

10. Get Term Life Insurance

11. Set up a Health Savings Account (HSA)

12. Start Contributing to an IRA

13. Get a Will in Place

14. Get Clarity on How to Get Raises or Promotions

15. Set Your Withholdings to Break Even

16. Consider Hiring a Financial Planner

17. Start Educating Yourself

18. Consider a Side Hustle

19. Set up Systems to Avoid Lifestyle Creep

20. Connect with the Your Financial Pharmacist Facebook Group

21. Use a high-yield savings account or money market account for big purchases

Financial Planning for Pharmacists

1. You’re Pursuing Public Service Loan Forgiveness

2. You’re Seeking Forgiveness After 20-25 Years

3. You Anticipate a Reduction in Your Income

4. You Can’t Get a Better Interest Rate

5. The Refinanced Terms Would Compromise Your Budget

6. You Can’t Get Approved by a Reputable Company

7. You Don’t Have Adequate Life and Disability Insurance

8. You Have Federal Loans That Are Included in the CARES Act

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Big Potential Savings

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